Question

The U.S. Bureau of Land Management sets a fee for ranchers who graze their animals on public land. The fee is equal to $1.43 per animal unit per month - the amount of forage needed to feed one cow and its calf, or five sheep, for a month. The market rate for grazing on private land is about $14 per animal unit per month.  

1. Why do you think there is a difference?
2. What are the advantages of setting the lower fee?
3. Would you expect excess demand for government grazing land? Why? Demonstrate graphically (You may draw by hand and upload to the discussion board as an image).

Answer 1

*Answer:

There is a difference because, the government aims at social welfare maximisation, while the private land owners aim for profit maximisation. If one want to maximise the welfare of its citizens, then it has to price it's product low, so that it is used by most users, which will increase the social welfare. On the other hand, if the aim is profit maximisation, then they pricing should be at the equilibrium level where the supply intersects demand, using the market mechanism.

The advantages of setting a lower price is that, it is accessible by the citizens. Secondly, it is cheap, so people will not have to pay a higher amount for it.

There will be an excess demand for government grazing lands, because at that price in the market, there is a much higher demand for grazing land, as it is below the equilibrium price of 14 dollars. Any price below the equilibrium price, will have an excess of demand over supply. I've attached the diagram to strengthen my point.

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